UPDATE 3-Avon profit beats on cost cuts, sales jump in Brazil, Russia

Tue Apr 30, 2013 1:58pm EDT

* 1st-qtr adj profit 26 cents/share vs est 14 cents/shr

* Brazil sales rise 11 pct in constant dollars

* Avon says likely to record a loss to settle govt probe

* Shares climb 3 percent

By Phil Wahba

April 30 (Reuters) - Avon Products Inc posted higher earnings on cost cuts and increased sales in Brazil and Russia, appearing to make progress in the turnaround plan its chief executive put in place last year.

The company - known for its door-to-door sales force - beat Wall Street forecasts and its shares rose 3 percent to $22.88 on Tuesday, their highest level since April 2012, when smaller rival Coty was trying to buy it.

Avon, which in 2012 reported a net loss, lower revenue and shrinking profit margins, is in the process of cutting $400 million a year by reducing jobs and advertising costs and exiting markets where it has struggled like South Korea, Ireland and Vietnam.

For the second quarter in a row, the size of its sales force expanded, helped primarily by Brazil - its top market.

"We are making progress toward our turnaround in some important areas," Chief Executive Sheri McCoy told investors on a conference call.

McCoy has presented her turnaround plan in increments.

Avon is trying to win back sales representatives. It also has upgraded computer systems in Brazil to make it easier for reps to fill orders. In Russia, it has been offering more products specifically for that market.

Wall Street analysts lauded the speed of improvements in the adjusted operating profit margin, which was 8.3 percent - 4.5 points better than a year ago, and above the 5 percent that Stifel Nicolaus projected.

Last year, McCoy set a goal of a margin in the low teens. In 2012, it fell to 2.9 percent of sales from 9.9 percent two years earlier.

Avon was also helped by lower advertising expenses, and lower freight costs. Overall, revenue in the quarter fell 3.5 percent to $2.48 billion, but was flat when stripping away the impact of currency fluctuations.

In Brazil, which accounts for one-fifth of sales, revenue excluding the impact of currency rose 11 percent as more sales reps joined. It was the third quarter of growth in that country. Revenue in Russia rose 4 percent in constant dollars.

Avon reported a net loss of $13.7 million, or 3 cents per share, compared with net income of $26.5 million, or 6 cents per share a year earlier.

Excluding items such as a charge related to the recent currency devaluation in Venezuela, a big market for Avon, the company reported adjusted net income of $112 million, or 26 cents per share, helped by cost cuts.

That was well above the 14 cents per share Wall Street analysts were projecting, according to Thomson Reuters I/B/E/S.

Avon, which last year began talks with the U.S. Department of Justice and the Securities and Exchange Commission to settle probes into whether company officials paid bribes overseas last decade, said in a regulatory filing that based on its latest discussions with those agencies, it is "probable" it will incur a loss that could be material.

The company did not disclose additional information.

NOT OUT OF THE WOODS

Avon's growth in Latin America and Eastern Europe contrasted with a poor showing in North America and in China, where sales continued to slide, falling 15 percent and 31 percent, respectively.

"They still have an uphill battle in key markets," Morningstar analyst Erin Lash said.

McCoy told Wall Street that it will take "some quarters" for things to improve in China, where Avon has fallen well behind rivals like Amway in recent years.

Avon said that globally, it sold 3 percent fewer items in the quarter, with the decline most pronounced in skincare, a crucial component of beauty products in Asia.

In North America, where Avon has suffered big sales declines and a shrinking salesforce for years, McCoy is working to improve product selection and compensation, and restore Avon's reputation, but she warned fixing the U.S. business will take time.

Shares have rebounded 68 percent since a 52-week low in November, largely because McCoy has delivered on her promise to stabilize the business. But at $23, they remain below the $24.75 per share Coty offered in a bid that was ultimately rejected.

McCoy, keeping to her cautious management style, again warned investors on the conference call to expect occasional setbacks in Avon's turnaround and recognized the company still faces daunting challenges.

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